Moaaz Manzoor

Pakistan’s sustained trade contraction is increasingly undermining investor confidence and clouding the country’s growth outlook, as persistent declines in exports and a widening trade deficit point to structural weaknesses in the economy. The latest trade data indicate prolonged external sector stress, with implications not only for near-term performance but also for longer-term investment decisions and economic momentum.

Data released by the Pakistan Textile Exporters Association (PTEA), based on official trade statistics, show that Pakistan’s exports declined by 20.41 percent year on year to $2.31 billion in December 2025, extending a run of five consecutive monthly declines. This prolonged contraction has reinforced perceptions of fragility in export performance, a key indicator closely monitored by domestic and foreign investors when assessing the economy’s growth potential.

The negative trend is not confined to a single month. Export proceeds fell by 12.49 percent in August, followed by declines of 3.88 percent in September, 4.46 percent in October, and 14.54 percent in November, before weakening further in December. Over the first half of the fiscal year, exports dropped by 8.70 percent to $15.18 billion, compared with $16.63 billion in the corresponding period last year. Such sustained weakness raises concerns about the economy’s ability to generate stable foreign exchange earnings over the medium term.

At the same time, imports have continued to rise, widening the trade deficit and intensifying external sector pressures. In December, imports increased by 2 percent year on year to $6.02 billion, while during July–December they surged by 11.28 percent to $34.38 billion. As a result, the trade deficit expanded sharply, reaching $3.7 billion in December and $19.2 billion in the first half of the fiscal year. The widening gap between exports and imports has added to uncertainty surrounding external sustainability.

For investors, persistent trade imbalances and export weakness can act as a deterrent. The document highlights concerns that the ongoing contraction signals structural issues, discouraging both domestic and foreign investment. When export earnings remain under pressure, firms face reduced incentives to commit capital to new projects, expand capacity, or invest in productivity-enhancing technologies. This hesitation can slow capital formation and weaken the economy’s growth trajectory.

The impact on growth prospects is closely linked to the role of exports as a driver of economic expansion. Prolonged export contraction limits the economy’s capacity to grow without heavy reliance on domestic demand or external financing. At the same time, widening trade deficits reduce fiscal and policy space, constraining the ability to support development spending and growth-oriented initiatives.

Investor sentiment is also influenced by expectations about future competitiveness and stability. Persistent trade contraction can reinforce perceptions of vulnerability, affecting long-term planning and risk assessments. The document notes that declining exports reduce incentives for innovation, quality enhancement, and technological advancement, all of which are critical for improving productivity and sustaining growth.

Overall, the data suggest that Pakistan’s sustained trade contraction is weighing on investor confidence and weakening the growth outlook. The combination of prolonged export declines and widening trade deficits underscores the challenges facing the economy’s external sector. Unless export performance stabilises and trade imbalances narrow, the persistence of these trends risks reinforcing cautious investor sentiment and constraining the economy’s growth potential in the period ahead.

Credit: INP-WealthPk